Friday, October 31, 2008

Two housing stories are worthy of note this morning - an alarming estimate of homeowners with negative equity and former Treasury Secretary Paul O'Neil's quite sensible plan to fix the housing market. First, the stunning data on underwater homeowners.From CNN/Money comes this report indicating that almost 20 percent of all borrowers owe more on their house than it is worth. Recall that about one-third of all U.S. homes have no mortgage (a novel concept, no?), so this figure would be about a third lower if measured across all residential real estate.

At least 7.5 million Americans owe more on their mortgages than their homes are currently worth, according to a real estate research firm's report released Friday.

In other words: If they sold their homes today, they'd have to bring a check to the closing. Ouch.

Another 2.1 million people stand right on the brink, according to the report by First American CoreLogic. Their homes are worth less than 5% more than the mortgages they're paying on them....Home values in Nevada and some other states rose particularly high during the real estate bubble - and are now plummeting. So even those who put 20% down when they bought their home don't stand a chance.

In many bubble markets, home prices got so high that the only way that many buyers could get a loan was by using what Fleming called "affordability products." These included adjustable rate mortgages with rates that were set artificially low for a few years, until resetting much higher, as well as mortgages that required little or no down payments.

These loans left buyers with little equity to begin with, and when prices dipped, they quickly found themselves underwater.

Ahhh... Memories...

When home prices were soaring, the mortgage industry created "affordability products" so the boom wouldn't have to end - all with the blessing of economists and policy makers because we had entered a new era where "risk" was being distributed with the help of financial innovation in mortgage securitization and insurance derivatives.

Back to the present...

The views of former Treasury Secretary Paul O'Neil on how he might go about fixing the housing market mess were the subject of this report at National Realty News the other day.

The plan is simple and straightforward, albeit quite painful, with absolutely no chance of garnering any support from any elected official.

Former treasury secretary, Paul O’Neill said that congress should scrap plans for a new economic stimulus package and instead simply require mortgage lenders to only make loans for people with a 20% or higher down payment.

On Tuesday, O’Neill addressed reports and indicated that he was not surprised that neither presidential candidate supported his position....According to a published reports O’Neill also said, "Unfortunately we've gotten to a point where people that want to run for president don't think they can tell the truth and still get elected. I'm hopeful whichever person gets elected, they'll be better than what they've said. An awful lot of presidential campaigns now are pandering to the lowest common denominator. They promise people everything."

As you might recall, O'Neil had a difficult time during his short tenure in Washington. His penchant for speaking his mind made for numerous political gaffes and, along with Christie Todd Whitman, hastened an early exit from the Bush Administration.

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comments:

My favorite nonsense proposal is Obama's "foreclosure moratorium." I think, if he does get elected, he's going to get quite a "talking to" by the "money guys" (with their pals Lenny and Squiggy) about how that's really not a "good idea."

As others on the web suggests, another name for that proposal is "free ride" and the suggestion, if that happens, is for people to just stop paying their mortgages.

Regarding underwater mortgages, this sounds quite similar to deleveraging. Very little capital using borrowed money to greatly magnify returns on that capital, followed by a loss which wiped out the little initial capital and left the borrower insolvent.

Regarding 20% down payment minimum requirement, didn't Fannie and Freddie already have such a requirement? If memory serves me, Countrywide was using "piggy back loans", i.e. 80% mortgage that can be sold to Fannie and a 20% home equity loan for the down payment.

20% down is not a SOLUTION to the problem that exists today. If the value of the property is less than the amount of the loan, I proposes a rate cut to 1 percent per annum, good for the next 12 months. Silly? Stupid? Outrageous?Not in my view.I considers this strategy the best way for lenders to preserve their investment and for borrowers to keep their homes. "What good is receiving a taxable amount ofinterest if the home reverts and you have an actual loss of principal?" It makes total sense to keep people in their houses.

I recommended a 1 percent interest rate and a 6% payment rate, for a home in Fresno. It was appraised at $262,000 when the homeowner borrowed $170,000. Today, the homeis appraised at $150,000.I have seen many borrowers give up and walk away from their homes.My clients taken back 37 houses in the past 12 months. In the previous 15 years, it was six homes.I am a Soquel, Ca. mortgage broker who proposes a sharp cut in interest rates to give borrowers hope.